##### Table of Contents

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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION


Washington, DC 20549





---




FORM 10-Q





QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934





For the Three Months Ended: September 30, 2002





Commission File Number 0-14371





---




COMPUCOM SYSTEMS, INC.


(Exact name of Registrant as specified in its charter)





Delaware

38-2363156(State or other jurisdiction ofincorporation or organization)

(I.R.S. EmployerIdentification Number)7171 Forest Lane, Dallas, TX 75230(Address of principal executive offices, including zip code)





(972) 856-3600


(Registrants telephone number, including area code)





Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ̈





The
number of shares of the Registrants common stock outstanding as of November 12, 2002 was 48,965,090 shares.





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##### Table of Contents



COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES




Index





PagePART I.

FINANCIAL INFORMATIONItem 1.

Financial Statements (unaudited)Condensed Consolidated Balance Sheets September 30, 2002 and December 31, 2001

3Condensed Consolidated Statements of Operations Three and nine months ended September 30, 2002 and 2001

4Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2002 and 2001

5Notes to Condensed Consolidated Financial Statements

6Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

17Item 3.

Quantitative and Qualitative Disclosure About Market Risk

28Item 4.

Controls and Procedures

28PART II.

OTHER INFORMATIONItem 1.

Legal Proceedings

29Item 6.

Exhibits and Reports on Form 8-K

29




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES




Condensed Consolidated Balance Sheets


(In thousands)


(unaudited)





September 30, 2002

December 31, 2001AssetsCurrent assets:Cash and cash equivalents

$
124,434

$
123,150Receivables, net


150,087


134,980Inventories


36,341


29,608Other


5,604


8,131Total current assets


316,466


295,869Property and equipment, net


25,750


31,566Goodwill


101,967


99,643Intangible assets, net


8,714


11,446Other


4,007


5,559Total assets

$
456,904

$
444,083Liabilities and Stockholders EquityCurrent liabilities:Accounts payable

$
137,312

$
120,173Accrued liabilities


70,075


88,598Total current liabilities


207,387


208,771Stockholders equity:Preferred stock


15,000


15,000Common stock


489


498Additional paid-in capital


73,517


76,252Retained earnings


160,511


149,131Treasury stock





(5,569
)Total stockholders equity


249,517


235,312Total liabilities and stockholders equity

$
456,904

$
444,083





See accompanying notes to condensed consolidated
financial statements.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES




Condensed Consolidated Statements of Operations


Three and Nine Months Ended September 30, 2002 and 2001


(In thousands, except per share amounts)


(unaudited)





Three months ended September
30,

Nine months ended September
30,2002


2001

2002

2001Revenue:Product

$
333,081


$
332,877

$
942,640

$
1,234,956Service


81,008



71,883


224,555


212,801Total revenue


414,089



404,760


1,167,195


1,447,757Cost of revenue:Product


306,955



299,792


863,504


1,121,887Service


54,574



45,638


146,598


137,382Total cost of revenue


361,529



345,430


1,010,102


1,259,269Gross margin


52,560



59,330


157,093


188,488Operating expenses:Selling


11,286



14,927


35,105


52,029Service


10,223



14,359


32,139


41,674General and administrative


17,770



22,446


54,265


66,924Depreciation and amortization


4,380



5,205


13,854


16,594Total operating expenses


43,659



56,937


135,363


177,221Earnings from operations


8,901



2,393


21,730


11,267Financing expense, net


(27
)


455


523


2,932Earnings before income taxes and cumulative effect of a change in accounting principle for negative
goodwill


8,928



1,938


21,207


8,335Income taxes


3,471



776


8,381


3,335Earnings before cumulative effect of a change in accounting principle for negative goodwill


5,457



1,162


12,826


5,000Cumulative effect of a change in accounting principle for negative goodwill, net of income taxes









707


Net earnings

$
5,457


$
1,162

$
13,533

$
5,000Basic earnings per common share:Earnings before cumulative effect of a change in accounting principle for negative goodwill

$
.11


$
.02

$
.25

$
.09Cumulative effect of a change in accounting principle for negative goodwill, net of income taxes









.01


Net earnings

$
.11


$
.02

$
.26

$
.09Diluted earnings per common share:Earnings before cumulative effect of a change in accounting principle for negative goodwill

$
.10


$
.02

$
.24

$
.09Cumulative effect of a change in accounting principle for negative goodwill, net of income taxes









.01


Net earnings

$
.10


$
.02

$
.25

$
.09Average common shares outstanding:Basic


48,734



48,146


48,513


47,988Diluted


51,001



49,355


50,154


48,557





See accompanying notes to condensed consolidated
financial statements.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES




Condensed Consolidated Statements of Cash Flows


(In thousands)


(unaudited)





Nine months ended September 30,2002


2001Cash flows from operating activities:Earnings before cumulative effect of a change in accounting principle for negative goodwill

$
12,826


$
5,000Adjustments to reconcile earnings before cumulative effect of a change in accounting principle for negative goodwill to
net cash provided by (used in) operating activities:Depreciation and amortization


13,854



16,594Deferred income taxes


503



(1,856
)Changes in assets and liabilities, excluding effects from acquisitions:Receivables


(15,107
)


154,199Inventories


(6,644
)


54,119Other current assets


(1,361
)


(1,552
)Accounts payable


17,139



(9,599
)Accrued liabilities and other


(16,450
)


(10,126
)Net cash provided by operating activities


4,760



206,779Cash flows from investing activities:Capital expenditures


(4,148
)


(16,528
)Business acquisitions, net of cash acquired






(104,338
)Net cash used in investing activities


(4,148
)


(120,866
)Cash flows from financing activities:Borrowings under revolver






8,000Repayments of revolver






(8,000
)Issuance of common stock


1,347



488Preferred stock dividends


(675
)


(675
)Net cash provided by (used in) financing activities


672



(187
)Net increase in cash and cash equivalents


1,284



85,726Cash and cash equivalents at beginning of period


123,150



14,857Cash and cash equivalents at end of period

$
124,434


$
100,583





See accompanying notes to condensed consolidated
financial statements.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Notes to Condensed Consolidated Financial Statements


September 30, 2002


(unaudited)







|(1) |  | General
|--- |  | -------




The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and the summary of significant accounting policies and notes thereto included in
the 2001 Annual Report on Form 10-K for CompuCom Systems, Inc. (CompuCom or the Company). In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements contain all adjustments
considered necessary for the fair presentation of the results for these interim periods. Interim results are not necessarily indicative of results expected for the full year.





|(2) |  | Contingencies
|--- |  | -------------




Previously, CompuCom reported that it, along with Safeguard and a number of other parties, had been named in a putative class action proceeding which arose out of the initial public offering of OPUS 360 Corporation
(OPUS), whereby the plaintiffs alleged material misrepresentations and/or omissions in connection with the initial public offering of OPUS stock. On October 2, 2002, the district court dismissed plaintiffs claims against Safeguard,
CompuCom, and the other defendants with leave to amend their complaint in part. The court explicitly granted plaintiffs leave to amend their pleadings with respect to misrepresentations and omissions in the initial public offering registration
statement but did not do so with respect to the claims dismissed as against Safeguard and CompuCom. On October 30, 2002, plaintiffs served their Second Amended Consolidated Class Action Complaint. The amended pleading did not name Safeguard or
CompuCom as defendants and thus there is no presently pending action as against them. There remains a possibility that plaintiffs would seek to appeal the dismissal of their claims against Safeguard and CompuCom in the near term or attempt to do so
at the conclusion of the still-pending action against the remaining defendants.





CompuCom is involved in various
other claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on CompuComs consolidated financial position and results
of operations, taken as a whole.





|(3) |  | Earnings per share
|--- |  | ------------------




Basic earnings per common share have been computed based on net earnings after preferred stock dividend requirements and the weighted average number of common shares outstanding during each period. Diluted earnings per
common share assumes conversion of dilutive convertible securities into common stock at the later of the beginning of the period or date of issuance and includes the add-back of related dividends, as required. Diluted earnings per common share also
assumes the exercise of all options with an exercise price below the average market price of the Companys stock, at the later of the beginning of the period or date of issuance, regardless of whether the options are vested or not. Earnings per
common share have been computed as follows (in thousands, except per share amounts):




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Notes to Condensed Consolidated Financial Statements


September 30, 2002


(unaudited)







Three months ended September 30, 2002

Nine months ended September 30,2002Earnings (Numerator)


Shares (Denominator)

EPS

Earnings (Numerator)


Shares (Denominator)

EPSEarnings before cumulative effect of a change in accounting principle for negative goodwill

$
5,457







$
12,826Less: Preferred stock dividends


(225
)







(675
)Basic EPSEarnings available to common stockholders before cumulative effect of a change in accounting principle for negative
goodwill


5,232


48,734

$
.11


12,151


48,513

$
.25Effect of dilutive securitiesStock options





2,222








1,596Employee stock purchase plan





45








45Diluted EPSEarnings available + assumed conversions

$
5,232


51,001

$
.10

$
12,151


50,154

$
.24Three months ended September 30, 2001

Nine months ended September 30, 2001Earnings (Numerator)


Shares (Denominator)

EPS

Earnings (Numerator)


Shares (Denominator)

EPSNet earnings

$
1,162







$
5,000Less: Preferred stock dividends


(225
)







(675
)Basic EPSEarnings available to common stockholders


937


48,146

$
.02


4,325


47,988

$
.09Effect of dilutive securitiesStock options





1,125








485Employee stock purchase plan





84








84Diluted EPSEarnings available + assumed conversions

$
937


49,355

$
.02

$
4,325


48,557

$
.09





CompuCom has excluded 2,439,832 and 4,070,707 shares from its
calculations of diluted earnings per share for the three and nine months ended September 30, 2002, respectively, and has excluded 6,491,579 and 6,801,826 shares from its calculations of diluted earnings per share for the three and nine months ended
September 30, 2001, respectively, as they are considered anti-dilutive.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Notes to Condensed Consolidated Financial Statements


September 30, 2002


(unaudited)




|(4) |  | Business Combinations
|--- |  | ---------------------




During 2001, CompuCom consummated four business combinations (collectively, the 2001 acquisitions). The 2001 acquisitions have been accounted for as purchase transactions. Accordingly, the consolidated financial
statements reflect the operations of the acquired businesses from the respective dates of acquisition. The aggregate purchase price of the 2001 acquisitions, net of cash acquired, was approximately $121 million. CompuComs allocation of the
aggregate purchase price for the 2001 acquisitions consisted of approximately $93 million to current assets, $1 million to non-current assets, $31 million to goodwill, $6 million to intangible assets with definite useful lives, and $10 million to
current liabilities. CompuCom used available cash to finance the 2001 acquisitions. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, approximately $1.3
million of negative goodwill associated with the 2001 MicroAge Technology Services, L.L.C. acquisition was recognized in the Condensed Consolidated Statements of Operations in the first quarter of 2002 as a cumulative effect of a change in
accounting principle.





The following unaudited pro forma financial information presents the combined results of
operations as if the 2001 acquisitions had occurred as of the beginning of 2001, after giving effect to certain adjustments, including amortization of intangibles with definite useful lives, increased financing expense on debt assumed to have been
incurred in relation to the 2001 acquisitions, and related income tax effects. The pro forma results do not necessarily represent results that would have occurred if the acquisitions had taken place on the basis assumed above, nor are they
indicative of the results of future combined operations.





Three Months Ended September 30, 2001

Nine Months Ended September 30, 2001(in thousands, except per share data)Revenue

$
412,253

$
1,493,385Net earnings

$
328

$
5,514Diluted earnings per share

$
0.00

$
0.10




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Notes to Condensed Consolidated Financial Statements


September 30, 2002


(unaudited)




|(5) |  | Goodwill and Intangible Assets
|--- |  | ------------------------------




In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other Intangible Assets. CompuCom has adopted the provisions of SFAS No. 142 effective January 1,
2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated residual values.





Under SFAS No. 142,
the Company was required to test all existing goodwill and intangible assets with indefinite useful lives for impairment as of January 1, 2002, on a reporting unit basis. A reporting unit can be the same as an operating segment, unless
discrete financial information is prepared and regularly reviewed by management at a component level, generally one level below the operating segment level. In this case, the component is the reporting unit. A fair value approach was
used to test goodwill for impairment. Under the fair value approach, an impairment charge would be recognized for the amount, if any, by which the carrying amount of goodwill exceeds its fair value. The valuation of each reporting unit was based on
combinations of both the income and market valuation approaches. CompuCom completed the required testing during the second quarter 2002. As a result of the goodwill impairment tests, no impairment losses were indicated.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Notes to Condensed Consolidated Financial Statements


September 30, 2002


(unaudited)




The following table provides comparative earnings and earnings per share had the non-amortization provisions
of SFAS No. 142 been adopted for all periods presented:





Three Months Ended September 30,

Nine Months Ended September 30,2002

2001

2002

2001(in thousands, except per share data)Impact on Statement of Operations:Earnings before cumulative effect of a change in accounting principle for negative goodwill

$
5,457

$
1,162

$
12,826

$
5,000Add back goodwill amortization





799





2,495Adjusted earnings before cumulative effect of a change in accounting principle for negative goodwill


5,457


1,961


12,826


7,495Cumulative effect of a change in accounting principle for negative goodwill, net of income taxes








707


Adjusted net earnings

$
5,457

$
1,961

$
13,533

$
7,495Impact on Basic Earnings Per Share:Earnings before cumulative effect of a change in accounting principle for negative goodwill

$
0.11

$
0.02

$
0.25

$
0.09Add back goodwill amortization





0.02





0.06Adjusted earnings before cumulative effect of a change in accounting principle for negative goodwill


0.11


0.04


0.25


0.15Cumulative effect of a change in accounting principle for negative goodwill, net of income taxes








0.01


Adjusted net earnings

$
0.11

$
0.04

$
0.26

$
0.15Impact on Fully Diluted Earnings Per Share:Earnings before cumulative effect of a change in accounting principle for negative goodwill

$
0.10

$
0.02

$
0.24

$
0.09Add back goodwill amortization





0.02





0.06Adjusted earnings before cumulative effect of a change in accounting principle for negative goodwill


0.10


0.04


0.24


0.15Cumulative effect of a change in accounting principle for negative goodwill, net of income taxes








0.01


Adjusted net earnings

$
0.10

$
0.04

$
0.25

$
0.15




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Notes to Condensed Consolidated Financial Statements


September 30, 2002


(unaudited)




The following is a summary of changes in the carrying amount of goodwill by segment for the nine months ended
September 30, 2002:





Product

Service

Unallocated


Total(in thousands)Balance at December 31, 2001

$
59,402

$
41,494

$
(1,253
)

$
99,643Cumulative change in accounting principle for negative goodwill








1,253



1,253Additions





1,071






1,071Balance at September 30, 2002

$
59,402

$
42,565

$



$
101,967





In accordance with SFAS No. 142, approximately $1.3 million of
negative goodwill associated with the 2001 MicroAge Technology Services, L.L.C. acquisition was recognized in the Condensed Consolidated Statements of Operations in the first quarter of 2002 as a cumulative effect of a change in accounting
principle. Goodwill additions during the nine months ended September 30, 2002 resulted from adjustments to the preliminary purchase price allocations related to the 2001 acquisitions.





Intangible assets with definite useful lives are amortized over their respective estimated useful lives to their estimated residual values. The following table provides a
summary of CompuComs intangible assets with definite useful lives as of September 30, 2002 and December 31, 2001 (in thousands):





Amortization Period

September 30, 2002Gross Carrying Value

Accumulated Amortization

NetCustomer-related

6  11 years

$
15,467

$
8,514

$
6,953Contract-related

24  36 months


2,840


1,079


1,761Total



$
18,307

$
9,593

$
8,714Amortization Period

December 31, 2001Gross Carrying Value

Accumulated Amortization

NetCustomer-related

6  11 years

$
15,467

$
6,690

$
8,777Contract-related

24  36 months


2,840


171


2,669Total



$
18,307

$
6,861

$
11,446




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Notes to Condensed Consolidated Financial Statements


September 30, 2002


(unaudited)




Amortization expense related to intangible assets with definite useful lives was $0.9 million and $2.7
million for the three and nine months ended September 30, 2002, respectively, and $0.5 million and $1.6 million for the three and nine months ended September 30, 2001, respectively. The following table provides estimated amortization expense related
to intangible assets with definite useful lives for each of the years in the five year period ending December 31, 2006:





Remainder of 2002

$
8962003


3,1462004


2,4942005


5792006 and thereafter


1,599$
8,714





|(6) |  | Restructuring Charges
|--- |  | ---------------------




During the first quarter of 2000, CompuCom effected a restructuring plan designed to reduce its cost structure by closing its distribution facility located in Houston, Texas, closing and consolidating three office
facilities, and reducing its workforce. As a result, CompuCom recorded a restructuring charge of $5.2 million. During the fourth quarter of 1998, CompuCom recorded a $16.4 million restructuring charge, primarily consisting of costs associated with
the closing of facilities and disposing of related fixed assets as well as employee severance and benefits related to a reduction in workforce.





The following table provides a summary rollforward by category of the activity in CompuComs restructuring accrual for the nine months ended September 30, 2002:





Accrual at December 31, 2001

Cash Payments


Accrual at September 30, 2002(in thousands)Lease termination costs

$
1,861

$
(343
)

$
1,518





The remaining accrual at September 30, 2002 is reflected in Accrued
liabilities on CompuComs Condensed Consolidated Balance Sheet and relates to eight leases for former office sites that have not been terminated, two of which have not been sublet. The Company believes the restructuring accrual is adequate.
Differences, if any, between the estimated amount accrued and actual amounts paid will be reflected in operating expenses in future periods.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Notes to Condensed Consolidated Financial Statements


September 30, 2002


(unaudited)




|(7) |  | Segment Information
|--- |  | -------------------




CompuCom defines its operations as two distinct businesses1) sales of personal computer-related products (product), which primarily includes desktop, networking, storage, and mobile computing products, as
well as peripherals and software-related products and licenses and 2) services (service), which is primarily derived from application design, development and maintenance, all aspects of desktop outsourcing, including field engineering,
as well as help desk and LAN/WAN network outsourcing, configuration, asset tracking, software management, mobile computing services, IT consulting, training, staff augmentation, and services provided in support of certain manufacturers direct
fulfillment initiatives. CompuCom measures segment earnings as operating earnings, defined as income before financing expense and income taxes. During the first quarter of 2002, CompuCom revised its segment measures for allocating operating expenses
between segments. CompuCom believes the new segment measures provide better information for the chief operating decision maker to assess segment performance and make resource allocation decisions. This change resulted in decreases of approximately
$5.0 million and $14.5 million for the three and nine months ended September 30, 2002, respectively, of allocated operating expenses to the product segment and corresponding increases by the same amounts to the services segment. In accordance with
SFAS No. 131, prior period amounts have not been restated.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Notes to Condensed Consolidated Financial Statements


September 30, 2002


(unaudited)







Three Months Ended September 30, 2002





Operating Results

Product


Service

Total(in thousands)Revenues

$
333,081


$
81,008

$
414,089Gross margin


26,126



26,434


52,560Operating earnings


3,058



5,843


8,901Financing expense, net









27Earnings before income taxes and cumulative effect of a change in accounting for negative goodwill








$
8,928Three Months Ended September 30, 2001Operating Results

Product


Service

Total(in thousands)Revenues

$
332,877


$
71,883

$
404,760Gross margin


33,085



26,245


59,330Operating earnings (loss)


(4,312
)


6,705


2,393Financing expense, net









(455
)Earnings before income taxes and cumulative effect of a change in accounting for negative goodwill








$
1,938




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Notes to Condensed Consolidated Financial Statements


September 30, 2002


(unaudited)







Nine Months Ended September 30, 2002





Operating Results

Product


Service

Total(in thousands)Revenues

$
942,640


$
224,555

$
1,167,195Gross margin


79,136



77,957


157,093Operating earnings


7,591



14,139


21,730Financing expense, net









(523
)Earnings before income taxes and cumulative effect of a change in accounting for negative goodwill








$
21,207Nine Months Ended September 30, 2001Operating Results

Product


Service

Total(in thousands)Revenues

$
1,234,956


$
212,801

$
1,447,757Gross margin


113,069



75,419


188,488Operating earnings (loss)


(8,234
)


19,501


11,267Financing expense, net









(2,932
)Earnings before income taxes and cumulative effect of a change in accounting for negative goodwill








$
8,335





|(8) |  | Financing Arrangements
|--- |  | ----------------------




At September 30, 2002, CompuCom had financing arrangements of $125 million, consisting of a $100 million receivable securitization (Securitization) and a $25 million working capital line of credit
(Revolver). Consistent with its financing requirements, CompuCom reduced the Securitization from $125 million to $100 million in August 2002.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Notes to Condensed Consolidated Financial Statements


September 30, 2002


(unaudited)







The Securitizations pricing is based on a designated short-term
interest rate plus an agreed upon spread. The Securitization allows CompuCom to sell, on an ongoing basis, its trade accounts receivable (receivables) to a consolidated, wholly-owned bankruptcy-remote special purpose subsidiary (the
SPS). The risk that CompuCom bears from bad debt losses on receivables sold is addressed in its allowance for doubtful accounts. The SPS has sold and, subject to certain conditions, may from time to time sell, an undivided ownership
interest in the pool of purchased receivables to financial institutions. As collections reduce receivables balances sold, CompuCom may sell interests in new receivables to bring the amount available up to the maximum allowed. The sales are reflected
as reductions of Receivables in the Condensed Consolidated Balance Sheets and are included in the net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows. The proceeds from the sale of receivables are used
primarily to fund working capital requirements. CompuCom is retained as servicer of the receivables; however, the cost of servicing is not material. Discounts associated with the sale of receivables totaled $0.4 million and $1.3 million for the
three and nine months ended September 30, 2002, respectively, and $1.1 million and $4.8 million for the three and nine months ended September 30, 2001, respectively, and are included in Financing expense, net, in the Condensed Consolidated
Statements of Operations. Amounts outstanding as sold receivables as of September 30, 2002 consisted of two certificates totaling $60 million. Within the context of the Securitization, each certificate is issued from a separate facility, each
facility set at $50 million. One $50 million facility, with an October 2003 maturity date, has one certificate issued for $50 million. The other $50 million facility, which initially had an April 2002 maturity date but was renewed in October 2002
for three years, has one certificate issued for $10 million.





The Revolver, which initially had a May 2002
maturity date but has been extended to a December 2002 maturity date, bears interest at a rate of LIBOR plus an agreed-upon spread and is secured by a lien on CompuComs assets. CompuCom expects the Revolver to be renewed prior to its maturity
date. Availability under the Revolver is subject to a borrowing base calculation. As of September 30, 2002, availability under the Revolver was $25 million. No amounts were outstanding under the Revolver as of September 30, 2002 and December 31,
2001. Terms of the Revolver limit the amounts available for capital expenditures and dividends. Both the Securitization and the Revolver require CompuCom to maintain compliance with selected financial covenants and ratios.





Interest income of $0.4 million and $1.5 million was earned during the three and nine months ended September 30, 2002, respectively, and
$1.2 million and $3.4 million was earned during the three and nine months ended September 30, 2001, respectively. Interest income is included in Financing expense, net, on the Condensed Consolidated Statements of Operations.





|(9) |  | Treasury Stock Retirement
|--- |  | -------------------------




In June 2002, CompuCom retired 1,431,525 shares of treasury stock which had been repurchased in prior years at a cost of $5.6 million.





|(10) |  | Reclassifications
|---- |  | -----------------




Certain prior period amounts have been reclassified to conform to the current period presentation.




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##### Table of Contents



COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES




Managements Discussion and Analysis of Financial Condition and Results of Operations


September 30, 2002





Founded in 1987, CompuCom Systems, Inc., together with its subsidiaries is a leading single-source provider of information
systems services and products designed to enhance the productivity of large and medium-sized organizations throughout the United States. CompuCom provides information technology outsourcing and system integration services that help clients reduce
the costs, complexities, obstacles and risks associated with new technology adoption, operational transition and on-going management of their information systems.





CompuComs discussion and analysis of its financial condition and results of operations are based upon CompuComs Condensed Consolidated Financial Statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires CompuCom to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. CompuCom bases its estimates on historical experience and on other relevant assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES




Managements Discussion and Analysis of Financial Condition and Results of Operations





Results of Operations





The following table shows CompuComs total revenue, gross margin and gross margin percentage by revenue source. Operating expenses, financing expense, income taxes,
cumulative effect of a change in accounting principle for negative goodwill, and net earnings are shown as a percentage of total revenue for the three and nine months ended September 30, 2002 and 2001:





Three months ended September 30,


Nine months endedSeptember 30,2002


2001


2002


2001Revenue:Product

$
333,081


$
332,877


$
942,640


$
1,234,956Service


81,008



71,883



224,555



212,801Total revenue

$
414,089


$
404,760


$
1,167,195


$
1,447,757Gross margin:Product

$
26,126


$
33,085


$
79,136


$
113,069Service


26,434



26,245



77,957



75,419Total gross margin

$
52,560


$
59,330


$
157,093


$
188,488Gross margin percentage:Product


7.8
%


9.9
%


8.4
%


9.2
%Service


32.6
%


36.5
%


34.7
%


35.4
%Total gross margin percentage


12.7
%


14.7
%


13.5
%


13.0
%Operating expenses:Selling


2.7
%


3.7
%


3.0
%


3.6
%Service


2.5
%


3.5
%


2.8
%


2.9
%General and administrative


4.3
%


5.6
%


4.6
%


4.6
%Depreciation and amortization


1.1
%


1.3
%


1.2
%


1.1
%Total operating expenses


10.6
%


14.1
%


11.6
%


12.2
%Earnings from operations


2.1
%


0.6
%


1.9
%


0.8
%Financing expense, net


0.0
%


(0.1
%)


(0.1
%)


(0.2
%)Earnings before income taxes and cumulative effect of a change in accounting principle for negative
goodwill


2.1
%


0.5
%


1.8
%


0.6
%Income taxes


0.8
%


0.2
%


0.7
%


0.2
%Earnings before cumulative effect of a change in accounting principle for negative goodwill


1.3
%


0.3
%


1.1
%


0.3
%Cumulative effect of a change in accounting principle for negative goodwill, net of income taxes










0.1
%


Net earnings


1.3
%


0.3
%


1.2
%


0.3
%




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Managements Discussion and Analysis of Financial Condition and Results of Operations




2001 Business Combinations (the 2001 acquisitions)





In January 2001, CompuCom purchased certain assets of MicroAge Technology Services, L.L.C. (MTS, or the MTS
acquisition). The purchase price of approximately $79 million (after post-closing adjustments) was financed using available cash. The purchased assets were used by MTS primarily in its business as a services provider and systems integrator of
personal computer products.





In July 2001, CompuCom purchased certain assets and assumed certain liabilities of
Excell Data Corporation (Excell, or the Excell acquisition) for approximately $27 million in available cash. The net assets acquired were used by Excell primarily in its business of high-end technical applications
development, network infrastructure design and deployment and worldwide event technical planning and support. Essentially all of the Excell workforce, consisting of technical application developers, consultants, and administrative personnel were
hired as part of the Excell acquisition. The purpose of the Excell acquisition was to expand the suite of CompuComs service offerings.





In November 2001, CompuCom purchased certain assets and assumed certain liabilities associated with the application development division of E-Certify Corporation (ClientLink, or the
ClientLink acquisition) for approximately $2 million in available cash and the surrender of such number of E-Certify Corporations common stock to decrease the Companys percent ownership from 22% to 19% of outstanding shares.
ClientLink provides high-end technical consulting, application development, deployment and maintenance services. The ClientLink acquisition further expanded the suite of CompuComs service offerings.





In November 2001, CompuCom acquired Northern NEF, Inc. (NNEF, or the NNEF acquisition) for approximately $15
million in available cash. NNEF is a federal systems integrator and solutions provider, whose services primarily include systems engineering, equipment procurement, software development, integration, test and training as well as related program
management support services to various defense and civilian agencies of the federal government. NNEF also provides the services to state governments and commercial accounts. The NNEF acquisition provides CompuCom with an entrance to the federal
marketplace and expands the capabilities NNEF can provide primarily to its federal clients through CompuComs existing service offerings.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Managements Discussion and Analysis of Financial Condition and Results of Operations




Comparison of the Quarter Ended September 30, 2002 to the Quarter Ended September 30, 2001





Product revenue is primarily derived from the sale of hardware, which includes desktop, networking, storage, and mobile computing products
and peripherals. Also included in product revenue is the sale of software, which includes software-related products and licenses. Product revenue increased from $332.9 million in the third quarter of 2001 to $333.1 million in the third quarter of
2002. The increase consisted of a 46.8% increase in software and software license revenue, offset by a 10.4% decline in hardware and other product revenue. Sequentially, software and software license revenue was essentially flat with the second
quarter 2002, while hardware and other product revenue decreased 6.5%. CompuCom believes demand for its products continues to be hampered by general economic conditions that have resulted in lower demand for personal computer products, mainly from
its Fortune 1000 client base. As a result of this economic slowdown, the Company believes product purchases and IT projects have been delayed, downsized or cancelled. In addition, product revenue has been negatively impacted by certain clients
electing to purchase product directly from manufacturers, as well as by increased competition from other direct marketers. CompuCom believes the increase in software revenue from the third quarter 2001 to the third quarter 2002 was primarily due to
announced changes in licensing programs of a certain software provider which resulted in increased demand for these licenses in the third quarter 2002.





Product gross margin as a percentage of product revenue decreased to 7.8% in the third quarter of 2002 from 9.9% in the third quarter of 2001, but increased from 7.5% in the second quarter 2002.
Contributing to the decrease from third quarter 2001 to third quarter 2002 was an increase in the proportion of lower margin software revenue relative to total product revenue. In addition, the Company engaged in more selective aggressive client
pricing primarily related to hardware sales and received less volume incentive dollars from its suppliers. Due to economic and competitive conditions, CompuCom expects to experience continued pressure on both product revenue and product gross
margin, the result of which may be to report both lower product revenue and gross margin dollars, as well as a lower gross margin percentage when compared to the comparable prior year period or previous quarter.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Managements Discussion and Analysis of Financial Condition and Results of Operations




Service revenue increased 12.7% to $81.0 million for the third quarter of 2002 compared to $71.9 million for
the third quarter of 2001. Sequentially, service revenue increased 6.8%. Service revenue is primarily derived from services directly related to the sale of product, such as configuration, vendor warranty contracts and services to support certain OEM
product fulfillment programs, IT outsourcing services, such as desktop support, infrastructure services, field engineering, help desk and other infrastructure related services, and application development, systems integration and other consulting
services. Service revenue reflects revenue generated by the actual performance of specific services and does not include product sales. The increase in service revenue from the third quarter 2001 to the third quarter 2002, as well as the sequential
increase from second quarter 2002 to third quarter 2002, was primarily due to services directly related to the federal government. Service gross margin as a percentage of service revenue for the quarter ended September 30, 2002 of 32.6% decreased
from 36.5% for the same period in 2001 and from 36.9% in the second quarter 2002. The decrease was primarily a result of the increase in lower margin services to the federal government. CompuCom expects to experience continued pressure on both
service revenue and service gross margin, the result of which may be to report lower service revenue and related service gross margin when compared to the comparable prior year period or previous quarter.





Selling expenses consist primarily of salary, commissions and benefits for sales and sales-support personnel, along with other costs
directly related to such personnel. Selling expense decreased $3.6 million for the three months ended September 30, 2002 as compared to the same period in the prior year. CompuCom attributes this decrease to its own cost management efforts,
primarily related to personnel and related costs. Selling expense as a percentage of revenue decreased to 2.7% for the three months ended September 30, 2002, down from 3.7% for the same period a year ago, and remained flat on a sequential basis.





Service expenses consist primarily of salary and benefits cost for personnel supporting the service business,
along with other costs directly related to such personnel. Service expense decreased $4.1 million for the three months ended September 30, 2002 as compared to the three months ended September 30, 2001 and $0.8 million on a sequential basis. The
decrease was due primarily to CompuComs cost management efforts, particularly personnel and related costs. As a percentage of revenue, service expense decreased to 2.5% for the three months ended September 30, 2002 from 3.5% for the same
period a year ago and remained relatively flat on a sequential basis.





General and administrative expenses consist
principally of salary and benefit costs for executive, operations, information services, and administrative personnel, along with certain infrastructure costs directly related to such personnel, as well as professional services and other general
corporate activities. General and administrative expense decreased $4.7 million for the three months ended September 30, 2002 as compared to the three months ended September 30, 2001 and decreased $1.1 million sequentially. The decrease is
reflective of the Companys ongoing cost management efforts which was primarily due to reductions in personnel-related costs. As a percentage of revenue, general and administrative expense decreased to 4.3% for the three months ended September
30, 2002 from 5.6% for the same period a year ago and remained relatively flat on a sequential basis. Operating expenses are reported net of reimbursements by certain manufacturers for specific training, promotional and marketing programs. These
reimbursements offset certain expenses incurred.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Managements Discussion and Analysis of Financial Condition and Results of Operations




Depreciation and amortization expense decreased approximately $0.8 million for the quarter ended September
30, 2002 as compared to the quarter ended September 30, 2001. The decrease was primarily due to the adoption of the non-amortization provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other
Intangible Assets, on January 1, 2002. This decrease was partially offset by increased amortization expense of identifiable intangibles with definite useful lives associated with the Excell and NNEF acquisitions. As a percentage of revenue,
depreciation and amortization expense remained relatively flat for the three months ended September 30, 2002 as compared to the three months ended September 30, 2001.





Regarding financing expense, net for the quarter ended September 30, 2002, interest income earned on the investment of available cash exceeded financing expenses incurred
during the quarter. This compares to net financing expense of $455,000 incurred during the third quarter 2001. The decrease in net financing expense was primarily a result of CompuComs continued improvement in working capital management as
well as the impact of a greater decrease in effective interest rates relative to interest rates earned on available cash.





As a result of the factors discussed above, CompuCom recorded net earnings for the quarter ended September 30, 2002 of $5.5 million. This compares to net earnings of $1.2 million for the quarter ended September 30, 2001.





Comparison of the Nine Months Ended September 30, 2002 to the Nine Months Ended September 30, 2001





Product revenue declined 23.7% from $1.2 billion for the nine months ended September 30, 2001 to $942.6 million for the nine months ended
September 30, 2002. The decline consisted of a 32.4% decline in hardware and other product revenue, partially offset by a 31.4% increase in software and software license revenue. CompuCom believes demand for the products it sells continues to be
hampered by general economic conditions that have resulted in lower demand for personal computer products, mainly from its Fortune 1000 client base. As a result of this economic slowdown, product purchases and IT projects have been delayed,
downsized or cancelled. In addition, product revenue has been negatively impacted by certain clients electing to purchase product directly from manufacturers, as well as by increased competition from other direct marketers. CompuCom believes the
increase in software was primarily due to announced changes in licensing programs of a certain software provider which resulted in increased demand for these licenses during the nine months ended September 30, 2002.





Product gross margin as a percentage of product revenue decreased to 8.4% in the nine months ended September 30, 2002 from 9.2% in the
nine months ended September 30, 2001. CompuCom believes this decrease is primarily due to an increase in the proportion of lower margin software revenue relative to total product revenue. Also contributing to the decline in product gross margin was
more aggressive pricing in certain circumstances primarily related to hardware sales and less volume incentive dollars received from suppliers. Due to economic and competitive conditions, CompuCom expects to experience continued pressure on both
product revenue and product gross margin, the result of which may be to report both lower product revenue and gross margin dollars, as well as a lower gross margin percentage when compared to the comparable prior year period.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Managements Discussion and Analysis of Financial Condition and Results of Operations




Service revenue increased 5.5% to $224.6 million for the nine months ended September 30, 2002 compared to
$212.8 million for the nine months ended September 30, 2001. The increase in service revenue was primarily due to services directly related to the Excell, NNEF and ClientLink acquisitions, offset by declines primarily in field engineering and
product-related services. Service gross margin as a percentage of service revenue decreased for the nine months ended September 30, 2002 to 34.7% from 35.4% for the same period in 2001, primarily as a result of the increase in lower margin services
to the federal government. CompuCom expects to experience continued pressure on both service revenue and service gross margin, the result of which may be to report lower service revenue and related service gross margin when compared to the
comparable prior year period.





Selling expense decreased $16.9 million for the nine months ended September 30,
2002 as compared to the same period in the prior year. Selling expense as a percentage of revenue decreased to 3.0% for the nine months ended September 30, 2002 from 3.6% for the same period a year ago. CompuCom attributes this decrease to its own
cost management efforts, primarily related to personnel and related costs, as well as lower commission expense related to the decline in revenue and gross margin.





Service expense decreased $9.5 million for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001. As a percentage of revenue,
service expense decreased slightly relative to the same period a year ago. The decrease was due primarily to CompuComs cost management efforts, particularly personnel and related costs, partially offset by personnel and infrastructure costs
associated with the 2001 Excell and ClientLink acquisitions.





General and administrative expense decreased $12.7
million for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001. The decrease is reflective of the Companys ongoing cost management efforts which primarily include personnel-related costs, as well
as certain infrastructure costs. General and administrative expense remained relatively flat as a percentage of revenue at 4.6% for the comparable periods.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Managements Discussion and Analysis of Financial Condition and Results of Operations




Depreciation and amortization expense decreased approximately $2.7 million for the nine months ended
September 30, 2002 as compared to the nine months ended September 30, 2001. The decrease was primarily due to the adoption of the non-amortization provisions of SFAS No. 142 on January 1, 2002. This decrease was partially offset by increased
amortization expense of identifiable intangibles with definite useful lives associated with the Excell and NNEF acquisitions. As a percentage of revenue, depreciation and amortization expense increased slightly relative to the same period a year
ago.





Financing expense, net decreased to $0.5 million for the nine months ended September 30, 2002 from $2.9
million for the same period in the prior year. As a percentage of revenue, financing expense declined slightly relative to the same period a year ago. The decrease in financing expense was primarily due to CompuComs continued improvement in
working capital management, as well as lower financing requirements due to the decline in product revenue. The decline was also due to a decline in effective interest rates for the nine months ended September 30, 2002 as compared to the nine months
ended September 30, 2001.





As a result of the factors discussed above, CompuCom recorded earnings before the
cumulative effect of a change in accounting principle for negative goodwill of $12.8 million for the nine months ended September 30, 2002. This compares to net earnings of $5.0 million for the nine months ended September 30, 2001.





Liquidity and Capital Resources





Working capital at September 30, 2002 was $109.1 million compared to $87.1 million at December 31, 2001. The increase in working capital was primarily the result of an increase in receivables. The increase in receivables was
primarily related to a $14.0 million reduction in the amount of receivables utilized under CompuComs securitization facility.





CompuComs liquidity is impacted by the dollar volume of certain manufacturers rebate programs. Under these programs, CompuCom is required to pay a higher initial amount for product and claim a rebate from the
manufacturer to reduce the final cost. The collection of these rebates can take an extended period of time. Due to these programs, CompuComs initial cost for the product is often higher than the sales price CompuCom can obtain from its
clients. These programs have been at times a material factor in CompuComs financing needs. As of September 30, 2002, CompuCom was owed approximately $16 million under these vendor rebate programs, as compared to approximately $14 million at
December 31, 2001.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Managements Discussion and Analysis of Financial Condition and Results of Operations




CompuComs working capital requirements are generally funded through financing arrangements and
internally generated funds. As of September 30, 2002, CompuComs financing arrangements consisted of a $100 million receivable securitization (Securitization) and $25 million working capital line of credit (Revolver).
Consistent with its financing requirements, CompuCom reduced the Securitization from $125 million to $100 million in August 2002. The Securitization pricing is based on a designated short-term interest rate plus an agreed upon spread. As of
September 30, 2002, amounts outstanding as sold receivables consisted of two certificates totaling $60 million. Within the context of the Securitization, each certificate is issued from a separate facility, each facility set at $50 million. One $50
million facility, with an October 2003 maturity date, has one certificate issued for $50 million. The other $50 million facility, which initially had an April 2002 maturity date but was renewed in October 2002 for three years, has one certificate
issued for $10 million. The Revolver, which initially had a May 2002 maturity date but has been extended to a December 2002 maturity date, bears interest at LIBOR plus an agreed upon spread and is secured by a lien on CompuComs assets.
CompuCom expects the Revolver to be renewed prior to its maturity date. Availability under the Revolver is subject to a borrowing base calculation. As of September 30, 2002, availability under the Revolver was $25 million. No amounts were
outstanding under the Revolver as of September 30, 2002 and December 31, 2001. Terms of the Revolver limit the amounts available for capital expenditures and dividends. Both the Securitization and the Revolver are subject to CompuComs
compliance with selected financial covenants and ratios.





CompuComs business is not capital asset intensive,
and capital expenditures in any year normally would not be significant in relation to its overall financial position. Generally, the Companys capital expenditures relate to its information technology hardware and software and improvements in
its distribution centers. Capital expenditures were $4.1 million for the nine months ended September 30, 2002, as compared to $16.5 million for the same period in 2001. The decrease is a result of higher than normal capital spending in the first
nine months of 2001 due primarily to upgrades to the Companys technology infrastructure and help desk offerings, system deployments to certain personnel, including those hired as part of the MTS acquisition, and certain other capital
investments associated with the MTS acquisition. CompuCom currently expects capital expenditures of approximately $3 million to $4 million for the fourth quarter 2002.





Recent Accounting Pronouncements





In July 2001, the
Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. CompuCom has adopted the provisions of SFAS No. 142 effective
January 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized but instead tested for impairment at least annually. SFAS No. 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their estimated residual values.





Under
SFAS No. 142, the Company is required to perform transitional impairment tests for its goodwill and intangible assets with indefinite useful lives as of the date of adoption. CompuCom completed the required transitional impairment tests during the
second quarter 2002. As a result of the goodwill impairment tests, no impairment losses were indicated.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Managements Discussion and Analysis of Financial Condition and Results of Operations




In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS
No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The Company will adopt SFAS No. 143 in fiscal year 2003. The Company does not expect the provisions of SFAS
No. 143 to have any significant impact on its financial condition or results of operations.





In July 2002, the
FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 applies to costs associated with an exit activity (including restructuring) or with a disposal of long-lived assets. SFAS No. 146 is
effective prospectively for exit or disposal activities initiated subsequent to December 31, 2002. The Company does not expect the provisions of SFAS No. 146 to have any significant impact on its financial condition or results of operations.





In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. SFAS
No. 147 pertains to the accounting for the acquisition of a financial institution other than through two or more mutual enterprises and is effective for transactions occurring on or after October 1, 2002. The Company does not expect the provisions
of SFAS No. 147 to have any significant impact on its financial condition or results of operations.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES





Managements Discussion and Analysis of Financial Condition and Results of Operations







Forward Looking Statements and Risks





This document contains forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange
Act of 1934. These forward-looking statements may be identified by words such as will, believe, anticipate, intend, estimate, expect, project and similar
expressions. Although we believe the expectations contained in the forward-looking statements are reasonable, we can give no assurance that the expectations will prove correct. In addition, the forward-looking statements do not reflect the potential
impact of any future acquisitions or mergers and related integration, dispositions, joint ventures, strategic investments or one-time events. These forward-looking statements are subject to certain risks and uncertainties and a number of factors
that could cause actual results to differ materially from those indicated by the forward-looking statements, and as a result could have an adverse impact on our business, financial condition and operating results. These factors include: our ability
to grow product and service revenue; the decline in product revenue and product gross margin may continue and may be greater than anticipated; our ability to meet manufacturers expectations in providing assistance in implementing direct
fulfillment initiatives; our ability to find additional ways to leverage costs and reduce costs further, including financing costs; our ability to improve operational efficiency; our ability to integrate acquired businesses into our operations; our
ability to win new clients; the expansion of the services the Company provides may not be as broad as the Company currently expects or widely accepted by clients; the manufacturers who use the Companys direct services may elect not to
use those services; our ability to retain key employees of acquired businesses; our ability to accurately value acquired businesses; and our ability to improve product and service gross margin and our balance sheet. Other factors that could cause
actual results to differ include: acquisition integration issues; the impact of competitive pricing and supply; manufacturers shift to direct fulfillment programs may be more significant than anticipated; the potential impact of the Hewlett
Packard and Compaq merger; lower demand than anticipated for the products and services the Company sells; changes to suppliers pricing, price protection, rebate and incentive programs; short-term interest rate fluctuations; general economic
conditions; employee turnover; potential impact of litigation; the ability to collect accounts receivable and vendor rebates receivable; the impact of certain business and economic factors on the valuation of certain investments in other businesses
CompuCom has made or may make; and other uncertainties that may have an impact on future revenue and earnings as well as the risks and uncertainties set forth from time to time in our other public reports and statements, including the risk factors
set forth in our Annual Report on Form 10-K. As a result, readers should not place undue reliance on these forward-looking statements.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES










Item 3.    Quantitative and Qualitative Disclosure About Market Risk





CompuCom is exposed to interest rate risk primarily through its Securitization and Revolver. CompuCom utilizes its Securitization and Revolver for its working capital and other borrowing needs. If CompuComs effective interest
rate were to increase by 100 basis points (1.00%), CompuComs annual financing expense would increase by approximately $0.6 million based on the average balances utilized under the Securitization and Revolver during the nine months ended
September 30, 2002.





Currently, CompuCom does not have any significant financial investments for trading or other
speculative purposes or to manage interest rate exposure.





Item 4.    Controls and Procedures





Within the 90 days prior to
the date of this report, CompuCom carried out an evaluation, under the supervision and with the participation of CompuComs management, including its President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of CompuComs disclosure controls and procedures. Based upon that evaluation, CompuComs President and Chief Executive Officer and Chief Financial Officer concluded that CompuComs disclosure controls and
procedures are effective in enabling it to record, process, summarize and report information required to be included in the periodic SEC filings within the required time period. There have been no significant changes in CompuComs internal
controls or in other factors that could significantly affect internal controls subsequent to the date CompuCom carried out its evaluation.




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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES




PART II.    OTHER INFORMATION





Item 1.    Legal Proceedings.





Previously, CompuCom
reported that it, along with Safeguard and a number of other parties, had been named in a putative class action proceeding which arose out of the initial public offering of OPUS 360 Corporation (OPUS), whereby the plaintiffs alleged
material misrepresentations and/or omissions in connection with the initial public offering of OPUS stock. On October 2, 2002, the district court dismissed plaintiffs claims against Safeguard, CompuCom, and the other defendants with leave to
amend their complaint in part. The court explicitly granted plaintiffs leave to amend their pleadings with respect to misrepresentations and omissions in the initial public offering registration statement but did not do so with respect to the claims
dismissed as against Safeguard and CompuCom. On October 30, 2002, plaintiffs served their Second Amended Consolidated Class Action Complaint. The amended pleading did not name Safeguard or CompuCom as defendants and thus there is no presently
pending action as against them. There remains a possibility that plaintiffs would seek to appeal the dismissal of their claims against Safeguard and CompuCom in the near term or attempt to do so at the conclusion of the still-pending action against
the remaining defendants.





|Item 6. |  | Exhibits and Reports on Form 8-K
|------- |  | --------------------------------




|(a) |  | Exhibits
|--- |  | --------




10.1

Executive Employment Agreement, dated July 17, 2002, between J. Edward Coleman and CompuCom Systems, Inc. (filed herewith)10.2

Executive Employment Agreement, dated July 17, 2002, between M. Lazane Smith and CompuCom Systems, Inc. (filed herewith)10.3

Executive Employment Agreement, dated July 17, 2002, between David A. Loeser and CompuCom Systems, Inc. (filed herewith)10.4

Executive Employment Agreement, dated July 17, 2002, between John F. McKenna and CompuCom Systems, Inc. (filed herewith)99.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





|(b) |  | Reports on Form 8-K
|--- |  | -------------------




| |  | None
| |  | ----



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COMPUCOM SYSTEMS, INC. AND SUBSIDIARIES




Signatures





Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





COMPUCOM SYSTEMS, INC.(Registrant)








DATE:    November 14, 2002



/s/    J. EDWARD COLEMANJ. Edward Coleman, Chairman of the Board, President,Chief Executive
Officer, and Director





DATE:    November 14, 2002



/s/    M. LAZANE SMITHM. Lazane Smith, Senior Vice President, Finance, ChiefFinancial Officer,
Secretary and Director




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##### Table of Contents

Certification





I,
J. Edward Coleman, certify that:





| | 1. |  | I have reviewed this quarterly report on Form 10-Q of CompuCom Systems, Inc.;
| | -- |  | -----------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date:    November 14, 2002


/s/    J. EDWARD
COLEMAN


J. Edward Coleman


President and
Chief Executive


Officer




31




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##### Table of Contents

Certification





I,
M. Lazane Smith, certify that:





| | 1. |  | I have reviewed this quarterly report on Form 10-Q of CompuCom Systems, Inc.;
| | -- |  | -----------------------------------------------------------------------------




| | 2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly
report (the Evaluation Date); and
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | 5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the equivalent function):
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




| | 6. |  | The registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Date:    November 14,
2002


/s/    M. LAZANE
SMITH


M. Lazane Smith


Senior Vice
President, Finance, and


Chief Financial Officer




32